5 things to know about Argentine debt crisis

What happens in Argentina is supposed to stay in Argentina. But the country’s downward spiral into its second default in 13 years is causing U.S. investors to wonder what this could mean for global markets.

Already, the Argentine situation and other geopolitical turbulence have unnerved U.S. markets and interrupted what was looking like a smooth July. Stocks are now down for the month as investors digest what this latest worry means. The Dow Jones industrial average is down more than 200 points, in part, on mounting concerns about global worries.

And to help investors, below are the five things that all investors need to know about the seemingly arcane world of Argentine debt, including:

* It’s happened before. This is Argentina’s second default in 13 years. In 2001, unemployment in Argentina reached more than 20%, causing riots, looting and political instability. The country saw five presidents in two weeks, the government stopped payment on more than $100 billion in debt – the world’s largest sovereign default, and by the end of the crisis the country’s economy had shrunk by a fifth. U.S. hedge fund managers who bought cheap Argentine debt in 2001 are now demanding the country pay interest on debt payments it defaulted on in 2001, and U.S. courts have now blocked payments to other bondholders until agreement with the “hold-outs” is reached.

* It’s bad, but not as bad as 2002. After the 2001 default, the country went into its worst recession in history. Despite fear of a second default in this century, no one is expecting the following recession to be anywhere near as bad as the one in 2002. Economists predict the dwindling central bank reserves will put pressure on the country to get out of the mess quickly this time around which is good for anyone interested in the market. Global markets are already showing that this isn’t being seen as a global-economic blow. Gold is down 0.7% Thursday, for instance, which is the opposite reaction of investors worried about global economic problems, says Jack Ablin of BMO Private Bank.

* Hedge funds aren’t the only losers. Certainly the hedge funds that are holding the Argentine debt are suffering the most, but there’s an impact on the global markets, says Van Wood, professor of international business at Virginia Commonwealth University. While the Argentine government may push back on the payments on the debt, the markets are reacting anyway. Argentine bonds are down roughly 7%, Ablin says. And with stocks, the Merval Index is down 6.7% today. Disruption to the Argentine economy is a strong possibility. Interest rates are likely to rise in Argentina, causing problems for more than just the stock market there, says Wood. “I feel sorry for the Argentine people,” he says, adding that inflation would be expected to rise and pinch pensioners and cause other disruptions in the economy. “It’s a bad deal all around,” he says. Borrowing costs will likely rise.

* Argentina is a perfect excuse for investors to sell U.S. stocks. The reaction by the U.S. market to the Argentina situation and other events isn’t cause and effect, says Marilyn Cohen of Envision Capital Management. She said stock investors have long been looking for a reason to lock in gains, and the news out of Argentina, which isn’t all that meaningful here, is perfect, she says. U.S. stocks are trading for roughly 17 times their earnings over the past 12 months, says S&P Dow Jones Indices. That’s much higher than their average 16.7 valuation on that basis over the past 10 years.

* The situation is not necessarily worst-case yet. There are still ongoing discussions with banks with the owners of the Argentine debt to shore up the situation. Citigroup and other banks are in discussions to buy the defaulted debt from Elliott Management, paving the way for a resumption of payments, says Bloomberg News citing a report from Buenos Aires-based newspaper Ambito. “This is still a fluid situation,” Ablin says.

This is not the biggest global issue facing markets. The Argentina situation isn’t good, but the it’s not the biggest issue unnerving U.S. investors, Ablin says. The larger issue at hand is the increasing worry about how sanctions against Russia could hurt the global economy, Ablin says. Shares of shoe maker Adidas are down 15% and airline Deutsche Lufthansa off 7% as both companies U.S. sanctions against Russia will hurt their business.